Psychology of Money

This is one of my favorite books, and I recommend it to everyone I know, urging them to read it at least once in a lifetime. I enjoyed reading it so much that I couldn't put the book down and finished it in record time. Allow me to summarize this book here in the hope that it may also influence some of you to read it.

I was so much inspired by this book that I am following Morgan Housel on Twitter and I keep retweeting the learning from the book in my Twitter feed.

The book explores the complex relationship between human psychology and financial decision-making. It's structured around key principles and anecdotes that shed light on the various ways people approach money and wealth. Lets get into some key learning from the book.

The Importance of Behavior: Can't emphasize more that the most critical factor in financial success is not intelligence or financial knowledge, but behavior. Understanding one's own psychology and behavioral biases is crucial for making sound financial decisions.

The Power of Compounding: Compounding has an extraordinary impact over time. Small, consistent investments can grow significantly when given time to compound. Warren Buffett is a living example, who became a billionaire through the power of compounding.

Here, I am quoting something from 'Atomic Habits' that is relevant and exemplifies the concept of compounding: 'If you get one percent better each day for one year, you'll end up thirty-seven times better by the time you're done.' This is why small choices don't make much of a difference at the time but add up over the long term. - James Clear

Risk and Uncertainty: While risk can be quantified and managed, uncertainty is unpredictable. People often underestimate the role of uncertainty in financial markets and make poor decisions as a result.

Housel also uses the story of Alfred Winslow Jones, who is credited with creating the first hedge fund, to explain the concept of risk-adjusted returns and the benefits of diversification.

The Importance of Saving: The book stresses the significance of saving money, even if it's a small amount. Housel cites the story of Ronald Read, a janitor and gas station attendant who amassed a multi-million dollar fortune through consistent saving and investing.

The Role of Luck: While many people don't believe in luck, Housel argues that luck plays a significant role in financial success and that many successful individuals owe part of their prosperity to luck. Recognizing this can help people avoid overconfidence and make better decisions

I believe in GOD, that helps me to be more grounded. Housel shares the story of Richard Fuscone, a millionaire who went bankrupt because he borrowed heavily to invest in risky ventures. This illustrates the dangers of excessive leverage and overconfidence.

The Influence of Herd Behavior: Housel discusses how herd behavior and the fear of missing out can lead to poor investment decisions. He uses historical examples, such as the dot-com bubble and the housing market crash, to illustrate the dangers of following the crowd. 

This is something I feel is the strong reason why a lot of fin-fluencers fleece on gullible people. These people always create a sense of urgency amongst people and they lure people into subscribing to their classes/workshops or the stock tips. The book references the financial market's emotional roller coaster, particularly during times of extreme optimism and pessimism, as seen in the 2008 financial crisis and the Bitcoin boom.

The Value of Time: Housel highlights the concept of "getting rich slowly" and the patience required for long-term financial success. He provides examples of individuals who built wealth over decades, emphasizing that quick riches are the exception, not the rule.

There is the case of Chris Sacca, a successful venture capitalist, who initially struggled with investing due to impatience. Sacca's early investment decisions serve as a lesson in the importance of time and patience.

Mental Models: Some mental models that can serve as good tools for better decision-making are below.

1. Compounding: The power of compounding is a fundamental mental model in the book. Understanding the exponential growth of money can encourage individuals to save and invest wisely.
2. Margin of Safety: Borrowed from value investing, the concept of a margin of safety involves making financial decisions that leave room for error or unexpected events. It's a mental model that encourages cautious and conservative financial planning.
3. Time Horizon: Housel discusses the importance of considering your time horizon when making financial decisions. Short-term thinking often leads to impulsive and detrimental actions, whereas a longer-term perspective can promote more rational choices.
4. The Circle of Competence: Borrowed from Warren Buffett, this model suggests that individuals should invest in areas they understand. Housel advises against investing in complex financial instruments or businesses you don't comprehend fully. like For example, if you don't understand blockchain better not gamble with the cryptocurrencies that boomed a few years back and are biting dust now.
5. The Paradox of Wealth: Housel explores the idea that wealth can often bring as many challenges and problems as it solves. This mental model encourages readers to think about the true purpose of accumulating wealth and the potential downsides of pursuing it relentlessly.
6. Loss Aversion: Housel discusses the well-known behavioral economics concept of loss aversion. People tend to feel the pain of losses more acutely than the pleasure of gains, leading to risk-averse behavior. Understanding this bias can help individuals make more rational investment decisions.
7. Hindsight Bias: Hindsight bias is the tendency to believe, after an event has occurred, that the outcome is predictable. Housel cautions against this bias by highlighting the unpredictable nature of financial markets and the danger of overconfidence.
8. The House Money Effect: This mental model refers to the idea that people tend to take more risks with money they perceive as "house money" or winnings. Housel discusses how understanding this concept can help individuals avoid reckless behavior after experiencing financial gains.
9. Narrow Framing: Narrow framing is the tendency to view financial decisions in isolation rather than considering their broader impact. Housel encourages readers to adopt a more holistic and long-term perspective when making financial choices.
10. Diversification: Housel emphasizes the importance of diversifying one's investments to manage risk effectively. This mental model underscores the idea that spreading investments across different asset classes can help protect against significant losses.

Bonus Tip : Reasonable > Rational

My tweet post on twitter(X) goes like this, "Clearing my home loan may not be rational considering the prevailing low-interest rates, tax benefits, and opportunity cost(equity returns) but it is reasonable to me being debt free."

There were low-interest times a couple of months back and it made sense to take loans and purchase assets or if you already had a loan then continue paying the interest on the loan and enjoy the capital gains on the investments made. But one key learning I picked up from the book is it is important to be reasonable over rational. Staying debt-free offers financial peace of mind, increased savings and investing opportunities, lower financial risk, reduced stress, and greater control over your financial future, among other benefits. It allows you to allocate your income toward your goals and values rather than servicing debt. And that staying debt-free I consider being reasonable.

Atomic Habits - Tiny Changes Remarkable Results

This is one of the books I read last year and helped me with good productivity hacks. For the benefit of my readers, I am going to summarize some of the learning from the book. This is a must-read for people, especially those struggling with procrastination.

Here's a summary of the key points in the book:

The Power of Atomic Habits: "Atomic habits" are tiny changes or actions that compound over time to produce remarkable results. It's not about making huge changes all at once but about focusing on small, manageable habits.

The British Cycling Team: Clear highlights how small habits and improvements led to significant success for the British cycling team. They made tiny adjustments in areas such as bike design, nutrition, and sleep, collectively resulting in multiple Olympic gold medals.

The Four Laws of Behavior Change:

1. Cue: Identify the triggers that initiate a habit.
2. Craving: Develop a strong desire or motivation for the habit.
3. Response: Implement the habit itself.
4. Reward: Experience positive outcomes or rewards as a result of the habit.

Habit Loop: Habits are formed through a loop of cue, craving, response, and reward. To change a habit, you can manipulate any part of this loop.

Alcoholics follow the habit loop of cue, craving, response, and reward. It shows how cues (meetings), cravings (desire to overcome addiction), responses (attending meetings), and rewards (support and community) play a vital role in changing behavior.

The Importance of Identity: A lasting change comes from a shift in one's identity. Instead of saying, "I want to lose weight," one should think, "I am someone who makes healthy choices." 

This reminds me of the Pygmalion effect taught in the Consumer Psychology and OB courses. It's also called a self-fulfilling prophecy where whatever we think kind of influences our behavior

Habit Stacking: This involves attaching a new habit you want to build to an existing habit. By linking the new habit to something you already do consistently, you make it easier to remember and integrate into your routine.

Environment Matters: The significance of designing your environment to support your desired habits. Small changes in your surroundings can have a big impact on behavior. For instance, place healthy snacks at eye level in your kitchen to encourage better eating habits.

The experiment of removing the TV from the bedroom exemplifies how modifying one's environment can facilitate better habits, in this case, improving sleep and family time.

Plateau of Latent Potential: Progress in habit-building often appears slow initially but compounds over time. Consistency is key, as small improvements can lead to significant transformations.

The Two-Minute Rule: Make a habit so simple that it takes less than two minutes to complete. This reduces resistance and makes it easier to get started. This helps prevent small tasks from piling up and becoming overwhelming

Time Blocking: Organize your day by blocking out specific chunks of time for different tasks or activities. This creates structure and helps you focus on one task at a time.

Implementation Intentions: Use "if-then" statements to plan your response to specific situations. For example, "If I'm tempted to check social media during work hours, then I will take a short walk instead."

Use Temptation Bundling: Pair an activity you want to do with an activity you need to do, so you're more likely to follow through with both.

Charles Duhigg's story of Claude C. Hopkins transforming the toothpaste industry highlights the concept of creating a daily routine (brushing teeth) by associating it with rewards (fresh breath).

Never Miss Twice: If you slip up on a habit, don't let it derail you completely. Get back on track as soon as possible to avoid the habit's decay.

An anecdote from the book; "Don't Break the Chain": Comedian Jerry Seinfeld used a simple habit-tracking technique to improve his writing. Seinfeld aimed to write jokes every day, and he marked a calendar with an "X" for each day he accomplished this goal. Over time, the chain of X's became motivating, and he didn't want to break it, leading to improved consistency in his work.

The Goldilocks Rule: Find the right level of difficulty for your habits – not too easy that they're boring, and not too hard that they're discouraging. 

This is something we apply in our budgeting process. Basically, the budget we set should be aspirational and achievable. If it is not aspirational it doesn't really push for improvement and at times gets boring and if it is not achievable then one would lose the motivation to achieve it.

Make It Satisfying: Reinforce good habits by making the rewards satisfying. Feel a sense of accomplishment when you complete a habit.

Habit Contracts: Make agreements with a friend or accountability partner to hold each other responsible for specific habits. External accountability can be a powerful motivator.

The book provides practical advice and a framework for individuals looking to make positive changes in their lives by focusing on small, consistent actions that build up over time. It combines psychological insights with actionable strategies to help readers understand and improve their habits for long-term success and personal growth. People who have completed their MBA with an interest in HR (OB) will find many concepts covered academically. However, the interesting aspect of the book is how James Clear brings out numerous anecdotes, some of which I have included in the summary above.

Bonus: Visualization Habit - Michael Phelps's use of visualization showcases the role of mental habits and how they can influence physical performance. Visualization serves as a mental cue and response that helps prepare him for success. In fact, this reminds me of a story I read about Virat Kohli, who also uses this visualization technique to simulate the scene on a cricket ground and then practice. He imagines facing some of the toughest bowlers and visualizes how he deals with each of their deliveries. Sometimes, even before going for an interview, I check the LinkedIn profiles of my interviewers and familiarize myself with their faces and interests. I remember looking at a photo of one CFO for almost 10 minutes before a final round interview. Trust me, it works.

People Management - Situational Leadership

This workshop was on how to lead a group of people.
 

The framework developed by Hershey & Blanchard covers all aspects of a follower mentality and suggest the respective style of leadership to be followed. Though this concept was taught as part of the OB course during my MBA, but it was better understood in the workshop conducted by Mr.Prem Kumar. For more practical understanding he chose the movie Chak De India, where each of the aspects of the framework were discussed.

For the benefit of my readers below is the framework of Hershey & Blanchard

 

If you see the followers(sub-ordinates/team members) are of 4 types. It is classified based on 2 factors and hence the 4 combinations.

 

The 2 factors are Ability and Willingness

R1 - Unable & Unwilling(No confidence/Insecure etc)

R2 - Unable but Willing

R3 - Able but Unwilling (May be due to personal problems/ego problems/lack of confidence etc)

R4 - Able & Willing

 

Now Leadership styles are also 4 types which are formed based on 2 factors.

The 2 factors are Task Behaviour/Regulation and Relationship behavior/Nurturing

S1 - High Regulation & Low Nurturing or High Task & Low Relation

This is more like directive type, where there will be only one way communication and the followers will be micromanaged. This applies to R1 type of followers

 

S2 - High Regulation & High Nurturing/High Task and High Relation

This is more like coaching type where the leader has to discuss with the followers and plan the works for them and motivate them by rewarding etc. This applies to R2 type of followers. Though the followers are unable they have the passion/interest to take up the work So by being high task oriented the leader will teach them on how to become capable.

 

S3 - Low Regulation & High Nurturing/Low Task & High Relation

This is more like counselling type, where the leader has to discuss with the followers and motivate them to resolve the problems. This applies to R3 kind of followers who lack only in motivation but not skill. These people dont like to be micromanaged on tasks. They need the socio-emtional support.

 

S4 - Low Regulation & Low Nurturing/Low Task & Low Relation

This is more a delegating type, where the leader just defines the boundary and lets the followers own up their areas and peform. This applies to R4 kind of followers, who are self sufficient in terms of skill and willingness. They dont like at all to be micromanaged. They like to work with freedom.

 

The most important point to be noted here is a leader has to be flexible enough to shift from S1 to S4 depending on the type of followers. Also the same set of followers might shift from R4 to R1 depending on various scenarios so nothing is hard and fast. But having an idea of this framework can aid a leader in understanding what type of style might work well for that situation.

That is why the framework is called situational leadership framework.

The following is a vote of thanks by me to our facilitator Mr.Prem Kumar, who is a very good orator and a sensible trainer who connects very well with his participants. I have attended 3 workshops of his so far and I rate him high on his facilitation.

 

Self Concept

This was discussed during a workshop conducted on Assertive Skills. The concept of self is very important when you communicate with people. I have tried my best in simplifying the concept. The text given to understand was not so simple :) and took sometime to come up with the below flipchart

 

The videos of the presentation follows.

Part - I



Part - II



Part - III

Ego Clashes Explained

Ego clashes happen with differences in perceptions.

The difference in what we think we are and what others think we are.

The bubbles in the image below are perceptions about the specimen.

 

Wider the gap between perceptions bubbles, higher are the chances for ego clashes..and if the person is a weak hearted and passive person will definitely end up crying and accepting what others think.

If the person is an agressive person will get into argument/fight with others.

An assertive person will make an attempt to clarify the situation by creating a dialogue.

 

 

When there is an overlap in perceptions, there will be little scope for clashes.

 

Now, You may comment on how to deal with such situations.